Two years ago, Yasuharu Kondo was overwhelmed with customers at his Toyota showroom in Tokyo. Sales were booming, and most shoppers looking for top-of- the-line models, the best their yen could buy. Those days are gone; today Kondo surveys a showroom full of sparkling new cars -- and not a customer in sight. "In my 30 years as a salesman," he says, "I have never seen it as bad as this."

The lament echoes across the $339 billion Japanese auto industry, which finds itself running low on gas. The industry accounts for 10% of Japan's overall economy; thus its falling fortunes...